The Deflation Myth is the Last Refuge of the Deniers

Frankly, I’m getting a little bit tired of it — the idea that we are entering a period of deflation.

Deflation is the last refuge of the deniers. Deniers want to deny that printing money creates inflating. Why? Because inflation will truly devastate the stock, bond and real estate markets.

So, if you like a stock such as Bank of America, you damn sure better believe that deflation is coming, otherwise your investment in BofA’s stock will be wiped off the planet if we have inflation. For that reason, a lot of people want to believe we will have deflation and not inflation.

Maybe you believe it too. But, let me ask you a question: If having the Fed buy massive amounts of government bonds with printed money, doesn’t create inflation, why don’t we do more of it?

There are few economist who wouldn't agree that if we eliminated all taxes tomorrow — including corporate and Social Security taxes — while maintaining all federal government spending, that we would boost the economy right out of the current slump and into a period of enormous growth.

All we have to do is borrow that money instead of taxing it. How do we borrow it? By selling bonds to the Federal Reserve. It’s exactly what we did in the past with QE1 and QE2. With the Fed buying the bonds, it won’t stress the bond markets. They just buy whatever it takes to fund the government each year. No more. No less.

Since the deflationists strongly assert that massive Federal Reserve purchases of government bonds (as they have done in the past few years with QE 1 and QE2) won’t create inflation, then what’s the downside? It seems like all upside to me. I don’t like paying taxes and I don’t know many individuals or corporations that do. I also know that getting rid of all taxes will be an enormous boost to the economy.

But we all know in our gut this if a fraud. We all know such money printing will create inflation. There really is no such thing as money from heaven and having the Fed buy our government bonds with printed money is NOT money from heaven. It is the fuel for inflation.

Inflation doesn’t start at a high level, but that mean it won’t get higher.

That’s where we are today — we are far enough along that inflation has started, but it has not gotten to a high level yet. Ask anybody who’s been in an inflationary environment and they will tell you that low inflation is no protection from higher inflation. Low inflation is simply the beginning of high inflation when you are printing massive amounts of money.

Let’s also be clear what deflation is not. Deflation is not when your house falls in value by 50 percent. That may feel like deflation but it most certainly is not. We know that because when home prices went up 50 percent during the housing boom nobody called that inflation — they called it a great investment!!! When home prices go down by 50 percent that’s simply a bad investment — not deflation.

Let’s also be clear that we have not had deflation in any way since the financial crisis. We have never had a negative Consumer Price Index, which would be the good indicator of deflation. We have always had a positive CPI. And most honest observers would say that the CPI significantly underestimates the true rate of inflation most consumers are facing.

So, that’s it. I wish that would end the silly deflation debate perpetrated by the deniers. But, it won’t. I know the only way to silence the deniers is reality. It was the same for people who thought housing prices would keep going up at 10 percent a year for at least another decade in 2003. They were wrong — terribly wrong, but they only admitted it once reality hit.

Of course, one of the proponent of that kind of thinking was Federal Reserve chairman Alan Greenspan (there’s just a bit of froth on the coasts he said). Come to think of it, one of the proponents of the thinking that money printing doesn’t create inflation is the current Federal Reserve Chairman, Ben Bernanke.

Seems like denying economic reality is one of the key job requirements for being Federal Reserve Chairman. But, denying reality won’t change reality as much as Alan or Ben or many others would like to think.

It helps people to justify bad investments, but it doesn’t turn those bad investments into good investments.

As much fun as it is short term, denial is not reality. And it never will be.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.